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Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part Two – Good Intentions and an Honest Effort to Avoid Work

DCAA will often assert that the ICE (Incurred Costs Electronically) and an ICP (Incurred Cost Proposal) are the same thing. They simply are not. This is true by regulation and by DCAA’s own guidance (Information for Contractors has an entire section acknowledging that they cannot require electronic submissions (p73)).

If you are a conscientious government employee and realize, for whatever reason, that there is not going to be a lot of audit work done in the foreseeable future, you might get a bit worried about simply accepting a contractor’s incurred cost proposal and recommending payment of a check to them on their rate variances. Honestly, taxpayers might thank you for that; but while this might provide aid and comfort to DCAA, it is not audit. These ‘questions’ follow none of the rules of audit or even, often, DCAA’s own written orders (“guidance”).

If you take the “A” is for Audit out of DCAA then you must rely on what little interaction you have with the contractor via the incurred cost proposal the contractor submits and certifies each year.

This is an extremely generous and positive view of why DCAA undertook what I am calling the “ICE Wars”.

There is no doubt that a standardized incurred cost proposal model would make DCAA’s work easier in the same manner that the IRS Form 1040 makes the work easier for the government.

Unfortunately, there is a major difference between the Model ICE and the IRS Form 1040, one of them is formally approved by the government regulators (Form 1040) and the other is not (DCAA Model ICE). As noted above, regulators rejected the ICE when adopting the regulations about submission.

One of the reasons the regulators rejected the ICE was its constant changing nature. Here are two examples, one benefits contractors and the other does not.

Section J

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contract information).

A careful reading of the regulation could support the position that contractors are required to report the above information on all subcontractors to include those working on prime fixed price contracts and even commercial work.

This was the position many DCAA auditors took at the time the government adopted the regulation. They argued that the complete data was necessary in order to evaluate the contractor’s purchasing systems and subcontractor management. I even had one client with no government participation where DCAA demanded an audit of them as a subcontractor on a prime with government participation.

Over time, many DCAA auditors moved away from this position and now the Model ICE focuses the reporting on those contracts with government participation. The current ICE Model Manuals reads:

A client and I actually panicked a couple of weeks ago when a DCAA supervisor took the original position. I could not argue with the auditor’s original interpretation of the regulation, but, fortunately, the auditor changed their mind before we could respond.

NOTE: Notice how DCAA got the regulation to match up with the Model ICE schedule titles. That was largely the extent of their success.

Executive Compensation

(iv) The following supplemental information is not required to determine if a proposal is adequate, but may be required during the audit process:

Executive Compensation is defined by statute, but DCAA asserts the right to ‘improve’ on the statute by claiming auditing the costs under the reasonable and prudent regulation “31.201-3 Determining reasonableness”[2].

As DCAA continues to lose many of these cases concerning compensation before the appeal board[3], they appear to be looking for a magic bullet to help with this issue, mainly via the supplemental form B, formerly form T. This form continues to grow with each version of the Model ICE. The latest version adds numerous new data collection points to the previous versions (MODEL ICE 2.01g):

“Basis of Contractor’s Compensation: Below, please check the box next to the item or items which describe the contractor’s basis for the proposed compensation costs, i.e. how the compensation levels were established in accordance with any existing policies and procedures. Also, did the contractor consider whether the proposed compensation was reasonable in accordance with FAR 31.205-6(b)? If so, include any reasonableness analysis, including all assumptions, data relied upon, compensation surveys and/or any other data. Include any attachments (survey data, comp plan/policy, etc.) separately.

Market Pricing Data (Compensation Surveys)

Prior DCAA Audit of Compensation Reasonableness

Written Compensation Plan/Policy

3rd Party (Consultant) Compensation Analysis

Management Judgment (No written plan/policy)

Other — ________________________________________

Determined by Board of Directors

(1) Indicate if Job Descriptions are available: YES ___ NO ___

*Written description Other compensation:

*Breakdown of Other compensation by cost element: “

This new version of the form reminds me of Admiral Ackbar’s line from “Return of the Jedi” – It’s a trap!”

This potentially turns a monstrous one page form into a monstrous form with a thousand page attachment. Sort makes you wish they were getting these forms approved and following the Paperwork Reduction Act.

To Form or Nor to Form

I agree with the FAR Council, which when adopting the regulation promised contractors they would not be required to use the DCAA Model. In the adoption of the regulation, the FAR Council brought up the DCAA Model ICE five (5) times and each time rejected its adoption:

“Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or subcontractor does not maintain in the ordinary course of business or pursuant to a provision of law.” The other respondent suggests that the proposed revision at FAR 42.705-1(b)(1) eliminates the suggestion in the current rule that contractors can use the DCAA model incurred cost rate proposal and supporting data for guidance on what constitutes an adequate final indirect cost rate proposal. According to the respondent, this proposed revision also refers the definition of adequacy to the revised clause at FAR 52.216-7(d)(2), which makes mandatory specific schedules and data requirements taken almost verbatim from the DCAA ICE Model.

Response: The information required from the contractor for an adequate indirect cost rate proposal is not new. No specific format is prescribed for the submission. This information should be readily available in the contractor’s books, records, and systems.”

Federal Register, Volume 76 Issue 104 (Tuesday, May 31, 2011)

Notice the wonderful reference to FAR 52.215-2(d)(2), but we all benefit if we follow the general outline of a universal submission as adopted by the FAR Council while ignoring the parts of the DCAA Model ICE that concern us or exceeds their regulatory authority.